Sponsored by Commonwealth Financial Network.
By Joni Youngwirth
Succession planning involves more than valuations and buy-sell agreements. Given all the blood, sweat, and tears you’ve put into your business, you don’t want to risk passing it to the wrong person—someone who doesn’t care for your clients the same way you do or who doesn’t value the staff who have supported you for years. But is it best to choose an internal or an external successor? There are pros and cons to each option.
Selling to Another Firm
External succession is process of selling your business to another firm. Within a year or so of selling the practice, the original owner leaves the business, and clients are securely transitioned to another advisor. If a couple of years seems like a long time, consider that external succession generally takes much less time than internal succession.
The solo advisor. External succession may be particularly appealing for advisors who would rather remain solo throughout their career and avoid the compromises involved in teaming up with another experienced advisor, not to mention the responsibility of finding, hiring, training, and mentoring a junior advisor. If you simply want to focus on working with your clients rather than managing the business side of your firm, remaining solo, selling your business to an outside firm, and staying in place just long enough to transition clients may be an optimal situation. For the solo advisor, there is something appealing about closing the door and walking away: When it’s over, it’s over.
One big pro for solo advisors who choose external succession is that they may receive offers from several eager buyers who are willing to pay full price. While an ensemble firm will likely sell only to another ensemble, a solo advisor can sell to another solo or to an ensemble.
The lifestyle practice. External succession is also compatible for advisors interested in having a lifestyle practice, where you enjoy a semi-retirement lifestyle for years before an actual business transition. (For those of you who may be potential buyers of a lifestyle practice, be sure to conduct sufficient due diligence to ensure that the practice hasn’t begun to wilt on the vine.)
Transitioning to an Internal Advisor
Internal succession is process of transitioning your business to another advisor or advisors in your firm. It requires finding, hiring, and developing a successor to take your place after you retire, which some advisors may consider a con of this succession option.
Finding the right successor. As mentioned earlier, internal succession involves a much longer lead time than external succession. The career development process should begin a decade or more before the senior advisor’s retirement. (It’s important to be aware that things don’t always turn out as expected, and you may need to go through at least one hiring and termination rotation before finding the right successor.) Because of the time they’ve spent working together, the senior advisor and his or her successor tend to be philosophically and operationally aligned, promoting a smooth transition for clients.
Apart from the time commitment, another con of internal succession is the lack of fresh talent in the industry. The number of senior advisors anticipating retirement is growing, but there may not be enough junior advisors to go around. Of course, many advisors joke that they plan to stay at the firm “until they drop.” That’s fine—as long as the advisor relinquishes responsibility for running the business to others.
Is it right for you? Firms that favor internal succession are typically larger. They continue to grow their top line, and they tend to have well-developed infrastructure and processes in place (e.g., internal career development plans). Keep in mind that discounted valuation is not uncommon in internal succession deals.
The Strength of Your Legacy
Whether you anticipate internal or external succession, keeping your name on the door may only be an illusion of a legacy if everything changes once you’re gone. You must decide what’s right for your practice and for your life. Remember, the strength of your legacy will have less to do with your firm’s branding than with the quality of the relationships you have developed throughout your career.
This post originally appeared on Commonwealth Independent Advisor, a blog authored by subject-matter experts at Commonwealth Financial Network®, the nation’s largest privately held independent broker/dealer–RIA. To subscribe, please visit http://blog.commonwealth.com/.
Joni Youngwirth is managing principal, practice management, at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.